Sanctions-hit Iran and its neighbours are seeking to resolve boundary uncertainties to unlock further oil and gas reserves in the Caspian Sea

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Representatives from the five Caspian states are due to meet in Kazakhstan in August to sign a convention on the legal status of the sea. It's a chance for Iran, Russia, Azerbaijan, Turkmenistan and Kazakhstan to agree the demarcation of oil blocks in a region that's becoming increasingly attractive for the sector as a counterweight to the politically risky Middle East.

US president Donald Trump's 8 May decision to re-impose nuclear sanctions on Iran and withdraw from the Joint Comprehensive Plan of Action (JCPOA) has focused minds at oil companies on the risks of doing business with Tehran. These could potentially cover Azerbaijan's Shah Deniz development, given Iran's national oil company is a minority stakeholder in the project.

Iranian officials have been intensifying their focus on the Caspian this year. In late March, the country's president Hassan Rouhani visited Azerbaijan to sign a memorandum of understanding (MoU) on joint development of oil and gas blocks close to their maritime border in the Caspian Sea. Tehran is pushing strongly for its preferred option to divide the area into five equal parts, with the heavy lifting to be focused on negotiations covering the precise demarcation of those borders.

Regional observers see Iran looking to the Caspian as a release valve from pressure elsewhere. "Iran is looking to develop relations and trade to its north, which is why we are seeing some progress in negotiations over the Caspian Sea's legal status," says Stanislav Pritchin, a regional analyst at Chatham House, a UK-based think tank.

The Azerbaijan-Iran MoU paves the way for development of two blocks in the Caspian Sea, including Araz-Alov-Sharg, exploration of which has been frozen, in view of the uncertainty over its demarcation.

"The limitations on the Caspian Sea was the key obstacle for Iran, so now it is looking for deeper cooperation with Azerbaijan," says Pritchin.

This could create a legal framework to develop projects in the Iranian sector. "If the principle of delimitation of the Caspian is realised, it means several oilfields on the border of their two sectors in the deepest part of the Caspian can be developed with or without the participation of Western majors," says Pritchin. However, sanctions—or the uncertainty caused by them—could still halt any developments in their tracks.

Officials at Iran's oil ministry say they've held talks with international oil companies that are actively engaged in deep-water drilling under joint projects with Azerbaijan's state-owned Socar in the Caspian. In November 2017, Tehran held talks with Norway's Offshore Resource Group (ORG) about the Sardar-e Jangal oilfield and three more blocks in the Caspian Sea. The Norwegian company presented development proposals for blocks 24, 26 and 29, as well as reconstruction of Iran's Amir Kabir rig.

Hossein Esmaeili Shahmirzadi, director general for the US, Europe and Caspian States at Iran's oil ministry, told the Azeri Trend news agencythat final talks would be held by a joint Iranian-Azerbaijani committee to be set up shortly. There's also talk of the two countries setting up a joint oil company-with Iran touting its Amir Kabir semi-submersible rig's capabilities to drill in the deeper waters of the Caspian.

Reviving oil swaps

Iran is now looking for new oil-swap opportunities with Caspian Sea littoral states. It has already started swaps with Turkmenistan, with Iran confirming in August last year the receipt of several Turkmen oil cargoes at Neka port.

Since resuming these swaps—ending a hiatus that started in 2009—Iran has taken delivery of an average of 15,000 barrels a day from Turkmenistan, but is eyeing more, alongside volumes from Azerbaijan and potentially Kazakhstan—a planned total of 200,000 b/d in 2018.

The unloaded crude at Neka port is transferred in stages through the 32-inch Neka-Sari-Rey oil pipeline to northern Iranian refineries. Under the swap arrangement, a similar amount of Iranian oil is then delivered to swap partners elsewhere in the Middle East-including the UAE's Dragon Oil. These shipments were the first swaps between Iran and a Caspian neighbour since 2012.

The Neka pipeline and related facilities, which supply the Tehran and Tabriz refineries, only have 360,000-b/d capacity, but Iranian officials believe this can be increased to 500,000 b/d.

Sanctions impact

The Azerbaijan upstream deal should help Iran to cover demand in the north of Iran. But, says Pritchin, if Iran can connect with Azerbaijan's pipeline networks it will be looking to convince its European customers that it can enhance their energy security. "This is an opportunity for Iran to increase its importance as an energy partner for the Europeans," he says.

That still leaves Iran's Caspian neighbours with concerns that sanctions on Iran could affect them too, potentially undermining recent efforts to boost energy cooperation in the Caspian. Azerbaijan's BP-led Shah Deniz project has a subsidiary of National Iranian Oil Company-Nastran Intertrade Company—as a 10% equity holder.

This could leave it vulnerable to US government sanctions. But there's room for cautious optimism in Tehran. Back in November 2012, while Iran was still under sanctions prior to the JCPOA deal, the US Treasury's Office of Foreign Assets Control said that its passive 10% ownerships in the Shah Deniz consortium didn't mean that the latter was a "person owned or controlled by" the Iranian government.